What's Amazon's Grand Strategy In Israel?

Israelis love to shop on Amazon, but considering the small market size and regional reach, it's unlikely the global retail giant will set up a shipping center in Israel. (Credit: Getty Royalty Free)

The past year has seen a slew of speculative articles in the local press about Amazon’s plans in Israel. The news threshold in the Israeli press regarding Amazon’s movements is low with gossip from anonymous sources often presented as news.

According to the most recent round of gossip, Amazon’s top European brass visited Israel to discuss delivery solutions in anticipation to the establishment of a Hebrew-language e-commerce website. Apparently the visit included Amazon senior network strategy manager Antoine Mosneron Dupin and cross-border transport AGL manager James O'Leary.

The recent visit came against the backdrop of Amazon’s test run of the Israeli market earlier, which saw the company offer free shipping for orders over $75. The limit was set to $75 because consumers are charged VAT (17%) for all overseas online purchases that exceed $75. The campaign saw impressive sales volumes across a range of categories.

“This meeting is simply a continuation of Amazon's move to streamline shipments into and within Israel. During this test phase, Israeli orders shipped from both U.S. and European distribution centers. The success of that push is leading Amazon's drive to establish better regional fulfillment to support this proven market. Amazon is not planning to open a distribution facility within Israel, thereby sidestepping nexus issues per lobbies, taxes, and regulations,” said Krista Fabregas, an e-commerce analyst.

Amazon currently ships to Israel either from U.S. or European distribution centers and deliveries are handled by Israel Post and carriers like FedEx and DHL or BoxIt lockers. The company seems to now be looking for ways to streamline Israeli shipments using its European distribution network and an Israel-based logistics company.

“By adopting European-focused distribution, Israeli sellers using Fulfillment by Amazon (FBA) have closer transits for their stock shipments and customer shipments don't have to travel overseas. Paired with improved localized delivery methods, this move cuts overall delivery times and costs for Amazon deliveries to customers throughout the country," Fabregas added.

Michael Benaroch from Syracuse University’s Whitman School of Management agrees that the latest visit does not signal the opening of a shipping center.

“Israel, a country with a population of only about 10 million, is too small a market for Amazon to focus on the e-tailing opportunities Israel presents. Amazon is a large a low profit margin firm. Latest reports suggest it made around $1.2 billion on revenues of $117 billion; that’s less than 1% profit margin. With Israel being so small, Amazon must be after other things as well.”

In October, Amazon reported a relatively unimpressive 3.8% operating profit, compared to Facebook’s 45%. For Amazon to go for a small market like Israel is unlikely and instead, setting sights on cutting-edge delivery solutions seems to be a more logical play.

Another reason to avoid a local presence is geopolitics. Israel is largely an island with neighbors it has no formal relations with, with the exception of Egypt and Jordan. A shipping center in Turkey, from where it can easily ship to the entire Middle East and parts of Europe, seems more realistic.

What’s the play?

Amazon today has over 200 employees in Israel, most working in R&D. In October last year, Amazon announced the establishment of two R&D centers in Israel dedicated to developing its Alexa Shopping platform for its Amazon Go store. The self-checkout store employs computer vision, deep learning algorithms and sensor fusion. For observers of the Israeli tech scene, these are exactly the kind technologies the country is known for. The local R&D is also heavily focused on cloud computing service AWS.

In 2015, in line with its R&D strategy in Israel, Amazon purchased Annapurna Labs, a local microprocessors startup, for $360 million. Furthermore, Amazon’s hiring spree is alive and well, even after reports about the company’s aggressive poaching tactics. Currently, Amazon is looking to fill 50 jobs mainly in software development, indicating a continued emphasis on R&D.

Indeed, Israel offers much in the space of R&D and specifically software development. The country’s talented pool of developers is in demand as evidenced by the presence of dozens of R&D centers, set up by global tech giants such as Google, Apple and Facebook.

In 2017, Israelis bought 61 million packages, 15% more than in 2016. In recent years Israelis have turned to online as local prices are one of the highest in the OECD. While the country is shopping online, the market is small on a global scale.

Indeed, the value of the Israeli consumer, unfortunately, isn’t what moves multinational behemoths. At least not to the extent of requiring a 270,000-square-foot warehouse for the sole purpose of delivering to Israeli customers.

Based on the plethora of news articles in the local press, it seems that Amazon’s grand strategy is more business as usual: expand R&D operations and work on effective solutions to cater to the Israeli consumer market.

Israeli consumers expecting Amazon to land in Israel and turn the local retail scene on its head are expecting too much, too soon. For Amazon, however, it would be an understandable decision, considering Israel’s strong retail lobbies and duopolies. Even for one of the world’s largest retailers, Israeli bureaucracy can be a formidable foe.

I'm a writer fascinated by the obvious and hidden dynamics between tech, culture and politics and how societies and habits are shaped by this interplay. Originally from Helsinki, with several years in the UK, I'm a Tel Aviv-based writer and journalist. In recent years I’ve f...